"To the extent necessary for the decision of this case, the Court of Appeal will, when rendering its (final) judgment, determine whether HVY has gone beyond said parameters and may disregard certain assertions of HVY on that ground. The Court of Appeal may also give the parties the opportunity to express further views on certain points, if it believes the right to be heard gives reason to do so."
(i) the Russian Federation has not (as a result of estoppel) forfeited its right to invoke the Limitation Clause (Interim Award nos. 286-288);
(ii) the Russian Federation may invoke the Limitation Clause, notwithstanding the fact that it has not made a declaration on the basis of Article 45(2)(a) ECT or otherwise indicated that it would not apply Article 26 ECT provisionally (Interim Award nos. 260-269; nos. 282-285);
(iii) the Limitation Clause constitutes an exception to the provisional application of the ECT only if the principle of provisional application is incompatible with Russian law, not if a specific ECT treaty provision is incompatible with Russian law (Interim Award nos. 301-329);
(iv) the question of potential incompatibility with Russian law must be assessed as of the moment the ECT was signed (Interim Award no. 343);
(v) the principle of provisional application is not incompatible with Russian law (Interim Award nos. 330-338);
(vi) superfluously: Article 26 ECT is not incompatible with Russian law: Article 9 LFI 1991 and Article 10 LFI 1999 provide that disputes between a foreign investor and the Russian Federation are arbitrable (Interim Award no. 370); the definitions of ‘foreign investor’ and ‘foreign investment’ in both LFIs are consistent with the definitions of ‘Investor’ and ‘Investment’ in Article 1 ECT (Interim Award no. 371); there is no ‘derivative action’, HVY claim compensation of their own direct loss (Interim Award no. 372); under the FLIT, the Russian Federation agreed to be bound by Article 26 ECT, albeit provisionally; this did not require ratification (Interim Award nos. 382-384); the requirement of Article 23(2) FLIT is merely an internal requirement and any failure to respect it does not terminate provisional application (Final Award no. 387);
(vii) it was not until 20 August 2009 that the Russian Federation notified the depositary of the ECT of its intention not to ratify the ECT; until then, it was a member of the ‘Energy Charter Conference’, a national of the Russian Federation was Deputy Secretary-General of the ‘Energy Charter Secretariat’, and the Russian Federation participated in the meetings of the ‘Energy Charter Conference’; in these arbitration proceedings, the Russian Federation cannot claim the benefits of provisional application of the ECT while disclaiming the obligations which that status imposes (Interim Award no. 390);
(viii) HVY meet the definition of ‘Investor’ in Article 1(7) ECT, as it is sufficient for this purpose that a company is validly organised in accordance with the laws of a State party to the ECT (Interim Award nos. 411-417);
(ix) in order to qualify as an ‘Investment’ within the meaning of Article 1(6) ECT, it is sufficient for HVY to have ‘legal ownership' of the shares they hold in Yukos; HVY have lawfully acquired and paid for their shares in Yukos; no ‘injection of foreign capital’ is required (Interim Award nos. 429-434).
(i) the ‘claw-back’ of Article 21(5)(a) ECT is applicable in the sense that the Russian Federation’s conduct that was at issue in the arbitrations has not been removed from the assessment of Article 13 ECT (Final Award nos. 1410-1416);
(ii) referral to the competent tax authorities under Article 21(5)(b) ECT would be pointless ("an exercise in futility") (Final Award nos. 1417-1428);
(iii) moreover, the ‘carve-out’ applies exclusively to bona fide taxation measures, i.e. measures designed to generate general revenue for the State, not measures which, as was the case with Yukos, served a completely unrelated purpose, such as the destruction of a company or the elimination of a political opponent (Final Award nos. 1430-1445);
(iv) the unclean hands argument does not preclude the Tribunal’s jurisdiction, nor does it have the effect of rendering HVY’s claims ‘inadmissible’ (Final Award nos. 1343-1373).
(i) Article 45(1) ECT must be taken to mean that the Russian Federation is bound solely by those provisions of the ECT that are compatible with Russian law (para. 5.23);
(ii) there would appear to be no latitude in these proceedings to rule on the question of whether the Tribunal could have accepted jurisdiction based on another argument that the Tribunal itself had rejected (para. 5.25);
(iii) the Russian Federation was not obliged to make a prior declaration as referred to in Article 45(2) ECT in order to enable it to successfully invoke the Limitation Clause (para. 5.31);
(iv) the provisional application of the arbitration clause contained in Article 26 ECT is not inconsistent with Russian law only to the extent that it is forbidden by that law, but also in the event that such a method of dispute resolution lacks a legal basis or is inconsistent with the legal system or is incompatible with the basic assumptions and principles laid down by or that can be deduced from legislation (para. 5.33);
(v) there can also be inconsistency with Russian law if that law makes no provision for the possibility of arbitration, as provided for by Article 26 ECT; given that arbitration is limited to civil disputes, Russian law does not allow arbitration that requires an assessment of actions under public law by the Russian Federation; the current case involves an exercise of powers under public law by the authorities of the Russian Federation (para. 5.41); Article 9(1) LFI 1991 and Article 10 LFI 1999 fail to provide an alternative (paras. 5.51 and 5.58);
(vi) Article 9(1) LFI 1991, which should be read in conjunction with Article 43 of the Russian Fundamentals of Legislation on Foreign Investments in the USSR of 5 July 1991 (hereinafter: the Basic Principles Act), deals with civil law disputes arising from legal relationships between foreign investors and the Russian Federation in which the public law aspect prevails; this provision confers primacy on proceedings before the Russian courts and allows other methods of dispute resolution only if so provided by a treaty; this implies that Article 9 LFI 1991 fails to provide an independent legal basis for arbitration between HVY and the Russian Federation (paras. 5.43 and 5.51);
(vii) Article 10 LFI 1999 is a ‘blanket provision’ in that it renders the possibility of arbitration subject to the existence of a provision to that effect in a treaty or a federal law (para. 5.56); Article 10 LFI 1999 thus provides no separate legal basis for dispute resolution between an investor and a State by means of international arbitration as provided for by Article 26 ECT (para. 5.58);
(viii) the Explanatory Memorandum to the ECT ratification bill, which was drafted by the executive to encourage the Duma to proceed with ratification, does not carry sufficient weight to substantiate HVY’s position; on the contrary, the legislative history of many bilateral investment treaties concluded by the Russian Federation supports the view that Russian law does not provide for the arbitration of disputes such as in the present case (paras. 5.59-5.64);
(ix) the arbitration clause of Article 26 ECT thus has no legal basis in Russian law and is incompatible with the basic assumptions set out in that law (para. 5.65);
(x) the District Court, like the Arbitral Tribunal, has yet to examine whether the fact of having signed a treaty that contains a provisional application clause is enough to establish that the Russian Federation agreed to international arbitration;
(xi) neither the FLIT nor the VCLT provide an independent basis for unlimited provisional commitment to the Treaty; whether a signatory State is bound by a treaty on the basis of the provisional performance thereof is determined by that treaty and not by the FLIT or the VCLT (para. 5.71);
(xii) by signing the ECT, the Russian Federation was only (provisionally) bound by the arbitration clause of Article 26 to the extent that the clause was compatible with Russian law (para. 5.72);
(xiii) pursuant to Article 15(4) of the Constitution and the principle of the separation of powers, a treaty can only set aside conflicting legislation if it has been approved by the legislature, i.e. ratified (para. 5.91);
(xiv) the case law of the Constitutional Court, from which it emerges that even provisionally applicable treaties are part of the Russian legal system, is without prejudice to the fact that a treaty such as the ECT can limit the scope of provisional application to treaty provisions that are compatible with the Constitution and other legislation and regulations (para. 5.92);
(xv) Article 26 ECT adds a new form of dispute resolution to existing Russian law, namely one in which an international arbitral tribunal can potentially rule on actions in the exercise of powers under public law; the Constitution and the principle of separation of powers enshrined therein preclude a representative of the executive power from committing the Russian Federation to Article 26 ECT (para. 5.93);
(xvi) in the absence of the legislature’s consent, the Limitation Clause in any event precluded the provisional application of Article 26 ECT for any longer than the six months specified by Article 23(2) FLIT, i.e. the period within which a signed treaty being provisionally applied must be submitted for the legislature’s approval; said period is not a domestic requirement, but rather a clause that addresses conflicts between the provisional application of treaty provisions and domestic Russian law, including the Constitution (para. 5.94);
(xvii) in summary, it follows from Art. 45(1) ECT that the Russian Federation, by merely signing the ECT, did not commit itself to the provisional application of (the arbitration rules of) Article 26 ECT; the Russian Federation thus never made an unconditional offer to engage in arbitration, as implied by Article 26 ECT, and, as a result, no valid arbitration agreement was formed by HVY's 'notice of arbitration' (para. 5.95).
(i) the standards the Court of Appeal should apply in interpreting the ECT (para. 4.2);
(ii) the provisional application of treaties (para. 4.3);
(iii) the question of whether the Court of Appeal can deny the application for setting-aside in so far as it is based on the lack of jurisdiction of the Tribunal, if it finds that the jurisdiction of the Tribunal follows from arguments that the Tribunal has not addressed (para. 4.4);
(iv) the question of whether HVY can advance arguments in support of the jurisdiction of the Tribunal in the present setting-aside proceedings which they did not put forward in the arbitration (para. 4.4);
(v) the interpretation of Article 45(1) ECT, particularly of the Limitation Clause, and the interpretation of Article 45(2)(a) ECT (para. 4.5);
(vi) whether in the Court of Appeal’s interpretation of the Limitation Clause, the provisional application of Article 26 ECT is inconsistent with the 'constitution, laws or regulations' of the Russian Federation (para. 4.6);
(vii) whether, based on the Russian Federation’s interpretation of the Limitation Clause, the provisional application of Article 26 ECT is inconsistent with the 'constitution, laws or regulations' of the Russian Federation (para. 4.7);
(viii) HVY's reliance on estoppel and acquiescence, the rule from the IMS/DIO case (para. 4.8).
General rule of interpretation
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) any relevant rules of international law applicable in the relations between the parties.
4. A special meaning shall be given to a term if it is established that the parties so intended.
Supplementary means of interpretation
Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31 :
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable."
"Article 45 Provisional application
1. Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.
2. (a) Notwithstanding paragraph 1 any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph 1 shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository.
(b) Neither a signatory which makes a declaration in accordance with subparagraph a nor Investors of that signatory may claim the benefits of provisional application under paragraph 1.
(c) Notwithstanding subparagraph a), any signatory making a declaration referred to in subparagraph a shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations.
3. (a) Any signatory may terminate its provisional application of this Treaty by written notification to the Depository of its intention not to become a Contracting Party to the Treaty. Termination of provisional application for any signatory shall take effect upon the expiration of 60 days from the date on which such signatory’s written notification is received by the Depositary.
(b) In the event that a signatory terminates provisional application pursuant to subparagraph a), the obligation of the signatory under paragraph 1 to apply Parts III and V with respect to any investments made in its area during such provisional application by investors of other signatories shall nevertheless remain in effect with respect to those investments for twenty years following the effective date of termination, except as otherwise provided in subparagraph c).
(c) Subparagraph b) shall not apply to any signatory listed in Annex PA. A signatory shall be removed from the list in Annex PA effective upon delivery to the Depositary of its request therefor."
"the effect is to suggest that relatively minor impediments in the form of regulations, no matter how insignificant they may be, can be the occasion for failing to apply the Treaty provisionally when in fact those regulations could be brought into conformity without serious effort."
"Notwithstanding paragraph 1 any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph 1 shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository."
HVY have argued that this provision is an extension of Article 45(1) ECT and that a contracting party which has not made a declaration in accordance with paragraph (2)(a) is not entitled to invoke the Limitation Clause. The Court of Appeal does not endorse this interpretation. The language of neither paragraph (1) nor that of paragraph (2) indicates that paragraph (2) is an elaboration of, or a further condition for, paragraph (1). To the contrary, the term 'notwithstanding' with which paragraph (2) commences indicates that paragraph (2) is intended to derogate from paragraph (1), namely from the primary obligation contained in paragraph (1), which is that the Treaty must be applied provisionally. Incidentally, the Limitation Clause being only able to apply if a state makes the declaration under paragraph (2)(a) is also inconsistent with the wording of the Limitation Clause. As considered above, the words 'to the extent' in the Limitation Clause unequivocally leave open the possibility that only part of the Treaty is applied provisionally, while paragraph (2)(a), which does not use language suggesting a partial provisional application, could hardly be understood differently than that the declaration it refers to excludes provisional application altogether. HVY's interpretation would therefore create a discrepancy between paragraph (1) and paragraph (2)(a), which would be avoided if paragraph (1) and paragraph (2)(a) were considered separately. This leads to the conclusion that the relationship between paragraph (1) and paragraph (2)(a) of Article 45 ECT should be understood as follows: paragraph (1) provides that signatories provisionally apply the Treaty, with the exception of cases falling within the scope of the Limitation Clause, while paragraph (2) allows states - in particular those not familiar with the principle of provisional application - to prevent any discussion of the scope of the Limitation Clause in an individual case by denouncing provisional application entirely.
"Notwithstanding subparagraph (a), any signatory making a declaration referred to in subparagraph (a) shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations."
Part VII of the Treaty contains provisions on the powers of the Energy Charter Conference, as well as on the secretariat of, and voting at, an Energy Charter Conference and the costs associated with this conference. The District Court derived an argument from this provision against the primary position of HVY (the 'all or nothing' approach), by considering that Article 45(2)(c) ECT uses virtually the same words ('to the extent that such provisional application is not inconsistent with its laws or regulations') as the Limitation Clause while, given the context, Article 45(2)(c) ECT cannot pertain to the principle of provisional application. The Court of Appeal endorses the judgment of the District Court in this respect. Indeed, it cannot be assumed that Article 45(2)(c) ECT pertains to the principle of provisional application. The fact that Article 45(2)(c) ECT nevertheless uses almost the same wording as in the Limitation Clause then indeed argues against the Limitation Clause referring to this principle.
"Wishing to implement the basic concept of the European Energy Charter initiative which is to catalyse economic growth by means of measures to liberalize investment and trade in energy."
Article 2 ECT ('Purpose of the Treaty') reads as follows:
"This Treaty establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter."
"Recognising the role of entrepreneurs, operating within a transparent and equitable legal framework, in promoting cooperation under the Charter."
Chapter II ('Implementation') of the European Energy Charter 1991 under 4 ('Promotion and protection of investments states:
"In order to promote the international flow of investments, the signatories will at national level provide for a stable, transparent legal framework for foreign investments, in conformity with the relevant international laws and rules on investment and trade."
"Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its area. (....)."
"(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;"
(hereinafter for the sake of brevity: 'state practice’). Both parties have relied on state practice in support of their assertions. The District Court disregarded these, because attributing significance to state practice is subject to the condition that this subsequent practice is evidence of an agreement on the interpretation of the Treaty between the parties, but it has not been established or demonstrated that there is a (broad) practice supported by all states involved (para. 5.21). HVY have not filed a grievance against this finding. However, the Russian Federation is of the view that state practice supports the District Court's interpretation, as it argues there is a broad consensus on the interpretation of Article 45(1) ECT. In this regard, the Russian Federation refers to the many declarations made by states under Article 45(2) ECT and to the Defence on Appeal nos. 108-121, the Writ of Summons nos. 155-170 and the Statement of Reply nos. 92.
"(a) it [Article 45(1) ECT, Ct] does not create any commitment beyond what is compatible with the existing internal legal order of the Signatories"
is compatible both with the position of the Russian Federation and with the alternative position of HVY. This also applies to the declaration made by Italy mentioned in the Writ of Summons under No 169. Only the Finnish Government's proposal to its Parliaments19 endorses the Russian Federation's interpretation, but it does not follow as such that this interpretation was also accepted by other contracting parties.
"My conclusion is both that the scope of Article 45 ECT as an instrument of provisional application is limited by the degree of inconsistency with national law, both under Dutch law, as well as from the perspective of the Dutch negotiators and from the EU perspective. Both Article 45 ECT and Dutch constitutional law do the same, namely assume that provisional application will have been applied only where this is permitted under national constitutional law, so that for the Netherlands this provision made the treaty fully in conformity with national law." is compatible with both views.
" "Provisional" application of the Protocol is not possible in the U.S., where a treaty or legislation is required before such a document can come into force.
This could be fixed with: "to the extent that their laws allow or some similar language." "
At a meeting on 14 December 1993 22, a representative of the United States of America remarked:
"Mr Chairman, my delegation does not have quite the same difficulty as some other delegations do with the concept of provisional application. We have no a priori opposition in principle to the concept in appropriate cases.
Quite apart from the question of the ultimate resolution of whether there should be institutions, the difficulty of participating of the financing of a provisional organization is particularly acute for the United States. We cannot under our law do it for more than a certain period and so, certainly, we could not provisionally apply the Treaty in respect to the United States in that connection."
In a letter (by fax) of 24 February 1994 to the ECT Conference 23 a representative of the United States further commented on a draft for a separate agreement on the provisional application of the ECT which was circulating at that time:
"As I noted during the last plenary, we do not have any legal difficulty with provisional application per se, so long as it is carefully qualified to ensure that no party is obliged to do, or refrain from doing, anything for which that party’s constitution or law requires an appropriately ratified treaty. Our law, for example, generally speaking prohibits expenditure of funds to pay the U.S. share of the expenses of an international organization absent the express approval of the Congress. For such reasons language along the lines of "to the extent permitted by its constitution or laws" is essential to any provisional application obligation; such language is conspicuously absent from the draft text."
"Italy cannot consent to the provisional application of the Treaty since Article 80 of the Italian Constitution lays down, inter alia, that international treaties which provide for arbitration, confer judicial powers or impose financial burdens must be ratified by Parliament."
Japan made the following comment in response to a document from the ECT Secretariat dated 8 March 199425 :
"We have a constitutional problem in relation to paragraph (2) of CONF 91, which lacks the phrase "in accordance with their laws and regulations". We cannot apply Article 37 of Part VII unconditionally after signature, because our domestic legislation prohibits the Japanese Government from committing itself beyond its competence to make payments regarding treaties which have not yet been concluded."
"Chairman, we’ve heard this question arise in a number of contexts. In one context, the Legal Sub-Group suggested that "in accordance with its law", in the singular, was sufficiently broad to cover the constitutional, statutory and regulatory laws of a country, but of course it does depend on the context. It seems that this desire, however, to specify "regulations" does arise often, and apparently it is because it is not, because some negotiating Parties are, do not consider that it is clear from the reference, so I am hesitant to try to give overly authoritative advice on something that really is probably very dependent on context.
Chairman Jones : May I put the question the other way around? Is there any harm in including the word "regulations"? I mean, for clarity, if a number of people are unsure, let’s include it I suppose?
Mr Bamberger : Well of course, Chairman, the effect is to suggest that relatively minor impediments in the form of regulations, no matter how insignificant they may be, can be the occasion for failing to apply the Treaty provisionally when in fact those regulations could be brought into conformity without serious effort. On the other hand, one can argue that the word "laws" would cover regulations, but it simply doesn’t put as much stress on the regulatory aspect, and so it is less likely to be viewed that way." 26
This discussion first of all reveals that the discussion in the 'Legal Sub-Group' about the inclusion of the word 'regulations' had not led to a clear outcome and that it was ultimately decided to include the term in the text of the Limitation Clause for the sake of completeness, but without any compelling necessity being perceived. Furthermore, it appears that when Bamberger noted that the term 'regulations' raises the suggestion that 'relatively minor impediments' might stand in the way of the provisional application of the Treaty, he was expressing his expert view as to what that term suggests. It does not show that the word 'regulations' was included in the text of the Treaty because it was considered desirable to have less important inconsistencies with national law also prevent provisional application. Moreover, it is clear that Bamberger spoke on his own behalf as an expert lawyer and not on behalf of the members of the 'Legal Sub-Group’. Against this background, Bamberger's remark is not decisive for the interpretation of the Limitation Clause. To sum up, the quoted passage confirms that the addition of the word 'regulations' was based on the desire to be as complete as possible in the reference to national law, but that it was not based on any more profound considerations.
Taking the interpretation of Article 45(1) ECT as accepted by the Court of Appeal in para. 4.5.48 above as a starting point, the Court of Appeal decides that the provisional application of the ECT is not inconsistent with the 'constitution, laws or regulations' of the Russian Federation. It has not been asserted or evidenced that Russian law comprises a rule that precludes the provisional application of Article 26 ECT. Art 23(1) FLIT reads:
"An international treaty or a part thereof may, prior to its entry into force, be applied by the Russian Federation provisionally, if the treaty itself so provides or if an agreement to such effect has been reached with the parties that have signed the treaty."
It follows that this provision does not comprise any limitation as to the treaty provisions, or types or categories of such provisions, that can be applied provisionally. The Russian legal scholars Osminin 32 and Karzov 33 confirm that there are no restrictions on the provisional application of treaties that have to be ratified. Nothing else follows from Article 23(2) FLIT, to which the Court of Appeal will return below in a different context, because it does not contain a restriction with regard to the nature of the provisions that may or may not be applied provisionally. This means that the Russian Federation was obliged to apply Article 26 of the ECT provisionally and that the District Court wrongly decided otherwise. To that extent, HVY’s grounds of appeal are successful.
(a) it is inconsistent with the principle of the separation of powers enshrined in Russia’s (constitutional) law if the Government, on behalf of the Russian Federation, were to unilaterally agree to the provisional application of Article 26 ECT; treaties containing arbitration clauses must be ratified;
(b) under Russian law, disputes concerning powers under public law, such as tax and expropriation disputes, cannot be submitted to arbitration;
(c) under Russian law, shareholders are not entitled to bring an action in consequence of a reduction in the value of their shares on account of damage caused to the company.
Article 15(4) of the Constitution reads:
"Universally recognized principles and norms of international law as well as international agreements of the Russian Federation shall be an integral part of its legal system. If an international agreement of the Russian Federation establishes rules, which differ from those stipulated by law, then the rules of the international agreement shall be applied."
Article 106 of the Constitution provides:
"Federal laws adopted by the State Duma on the following issues must compulsorily be examined by the Council of Federation:
d) ratification and denunciation of international treaties of the Russian Federation."
Article 15 FLIT provides, inter alia:
"1. The following international treaties of the Russian Federation shall be subject to ratification:
a) international treaties whose implementation requires modification of existing legislation or the enactment of new federal laws, or that set out rules different from those provided for by law;
2. An international treaty shall likewise be subject to ratification if the parties have agreed to subsequent ratification when concluding the international treaty."
Article 17 FLIT (‘Decisions to ratify international treaties of the Russian Federation’) provides, inter alia:
"1. The State Duma shall consider proposals for the ratification of international treaties and, after preliminary discussion in committees and commissions of the State Duma, make relevant decisions.
Federal laws adopted by the State Duma for the ratification of international treaties of the Russian federation shall be subject, in accordance with the Constitution of the Russian Federation, to mandatory consideration in the Federation Council."
Article 23 FLIT (‘Provisional application of international treaties by the Russian Federation’) reads:
"1. An international treaty or a part thereof may, prior to its entry into force, be applied by the Russian Federation provisionally, if the treaty itself so provides or if an agreement to such effect has been reached with the parties that have signed the treaty.
2. Decisions on the provisional application of a treaty or a part of a treaty by the Russian Federation shall be made by the body that has taken the decision to sign the international treaty according to the procedure set out in Article 11 of this Federal Law.
If an international treaty - the decision on the acceptance of the binding character of which in respect of the Russian Federation is, under this Federal Law, to be passed in the form of a Federal Law - provides for the provisional application of a treaty or a part thereof, or if an agreement as to such provisional application was reached among the parties in some other manner, then this treaty shall be submitted to the State Duma within six months from the start of its provisional application.
The term of provisional application may be prolonged by way of a decision taken in a form of a federal law according to the procedure set out in Article 17 of this law for the ratification of international treaties.
3. Unless the international treaty otherwise provides, or the respective States otherwise agree, the provisional application of a treaty by the Russian Federation or a part thereof shall be terminated upon notification to the other States that apply the treaty provisionally of the intention of the Russian Federation not to become a party to the treaty."
"The Russian Federation belongs to a third group of State, which also includes, among others, Spain and Switzerland. In these States, the relevant authorized bodies of State power are not limited in their right to make independent decisions with respect to provisional application of international treaties, including those that require adoptation of a law in order to be entered into."
(emphasis added by the Court of Appeal)
In the same vein Zvekov and Osminin 42 :
"From this it follows that exception(s) to the federal law on the basis of provisional application are possible."
"The Russian Federation’s consent to the provisional application of a treaty means that the treaty becomes part of the legal system of the Russian Federation and is subject to application on an equal basis with treaties that have entered into force."
while this memo also stated:
"Under the above-mentioned federal law [the FLIT, added by the Court of Appeal], the decision on the provisional application by the Russian Federation of a treaty is taken by the Government of the Russian Federation or the President of the Russian federation (depending on within whose competence the questions constituting the subject of the treaty reside)."
"Agreement to provisional application of an international treaty means that it becomes part of the legal system of the Russian Federation and must be applied on the same basis as international treaties that have entered into force (unless otherwise expressly stated by the Russian Federation), since otherwise provisional application would be meaningless.
Being guided by the Vienna Convention on the Law of Treaties and provisions of the Federal Law "On International Treaties of the Russian Federation" in their literal interpretation, public authorities and officials of the Russian Federation consistently pursue the legal policy which provides that provisions of a provisionally applied international treaty become part of the legal system of the Russian Federation and, like international treaties of the Russian Federation that have entered into force, have priority over Russian laws in the absence of the officially published text, including instances when they alter the regulatory content of rights, freedoms and duties of man and citizen.
From the point of view of the requirements set forth in Article 15 (part 4) of the Constitution of the Russian Federation in conjunction with its Articles 2, 17 (part 1) and 19 (part 1), provisionally applied international treaties of the Russian Federation by their legal consequences, effect on rights, freedoms and duties of man and citizen in the Russian Federation are essentially equivalent to international treaties that have entered into force, ratified and officially published in accordance with the procedure established by federal legislation."
"In case of a discrepancy between a federal law and a provisionally applicable treaty, we nevertheless consider that the international treaty shall apply, as the meaning of provisional application is, precisely, to apply the treaty immediately."
"By virtue of the hierarchy of legal acts, priority over the laws of the Russian Federation is accorded to international treaties of the Russian Federation concluded on behalf of the Russian Federation (interstate treaties), consent to be bound by which was given in the form of a federal law."
Treaties for which ratification is not prescribed may take effect by their signing by the President, the government or a state body; however, their status is lower than that of a ratified treaty, in the sense that after their entry into force, they do not have priority over legislation. The matter at hand regards a treaty that has to be ratified in order to take effect, and the question whether that treaty can be provisionally applied prior to its entry into force ('prior to its entry into force', see Article 23(1) FLIT). The court decisions the Russian Federation invokes do not regard this latter category of treaties, unlike said Resolutions 8-P and 6-P of the Constitutional Court. The Court of Appeal will discuss some of the judgments on which the Russian Federation relies in more detail.
"At the time of the signing of the ECT, its provisions on provisional application were in conformity with the Russian legal acts. For that reason, the Russian side did not make declarations as to its ability to accept provisional application (such declarations were made by 12 of the 49 signatories).
The provisions of the ECT are consistent with Russian legislation."
The first sentence from this quote reads, in the - according to the Russian Federation - correct translation:
"At the time of signing of the Energy Charter Treaty, the provision regarding provisional application was not in contravention of the Russian legal acts." 61
These passages allow no other interpretation than that the government held the view that the provisions of the ECT, which necessarily include the provisions about international investment arbitration of Article 26 ECT, were 'consistent' with Russian law and that there was no reason to limit the provisional application of the ECT in any way by making a statement. Although naturally, this position of the government does not bind the State Duma, it constitutes a strong indication that the current position of the Russian Federation about the incompatibility of such arbitration with Russian law is not correct. Although in the Explanatory Note, it is not mentioned in so many words that Article 26 ECT is 'consistent' with Russian law, it can hardly be imagined that such a text would have been included in the Explanatory Note if the government had believed that Article 26 ECT was indeed inconsistent therewith. The Russian Federation's argument that this passage in the Explanatory Note pertain to the situation after ratification is contradicted by the clear text of the passage, which takes 'the time of the signing' (of the Treaty) as the point of reference.
"Courts shall also review cases with foreign citizens, stateless persons, foreign enterprises, and organizations participating in them, provided that no alternative is stated in interstate agreements, international agreements or agreements between the parties."
And Article 1(2) reads 63 :
"If an international treaty of the Russian Federation has established the rules for the civil court procedures different from those stipulated by the law, the rules of the international treaty shall be applied."
These provisions allow for no other conclusion than that treaties may entail rules that have as a consequence that disputes other than civil law disputes may be subjected to arbitration.
"If an international treaty of the Russian Federation establishes rules other than those which are contained in the Russian legislation relating to arbitration (third-party tribunal), the rules of the international treaty shall be applied."
Also in this case, therefore, an exception was explicitly made for arbitration based on a treaty.
"If the rules of the court proceedings, established by an international treaty of the Russian Federation, differ from those stipulated by the legislation of the Russian Federation, the rules of the international treaty shall be applied."
This also shows that the national rules on the question of what disputes are arbitrable do not preclude that a treaty may offer more options for dispute resolution by means of arbitration..
Articles 5, 9 and 10 LFI 1991 read:
Legal Protection of Foreign Investments in the RSFSR
Relations linked with foreign investments in the Russian Federation are regulated by the present Law, as well as by other legislative acts and international agreements in force on the territory of the Russian Federation. Should international agreements, in force on the territory of the Russian
Federation, determine other rules than those, contained in the RSFSR legislation, the rules of an international agreement shall apply.
Procedures for Settling Disputes
Investment disputes, including disputes over the size, terms or procedure for paying compensation shall be settled by the Supreme Court of the Russian Federation or in the RSFSR Supreme Court of Arbitration, if no other procedure is envisaged by some international agreement in force on the territory of the Russian Federation.
Disputes of foreign investors and enterprises with foreign investment with state bodies of the Russian Federation, enterprises, public organizations and other juridical persons of the RSFSR, disputes among investors and enterprises with foreign investment on matters linked with their economic activities, as well as disputes between participants of an enterprise with foreign investment and the enterprise itself are subject to settlement in courts of the Russian Federation or, on agreement between sides, in a Court of Arbitration.
An international agreement in force on the territory of the Russian Federation may envisage the use of international means for settling disputes, arising from foreign investments on the territory of the Russian Federation.
Guarantee of Proper Settlement of Disputes Related to Investment and Business Activities of Foreign Investors in the Russian Federation
Any dispute involving a foreign investor and related to the investment and business activities of such investor in the Russian Federation shall be settled in compliance with the international treaties of the Russian Federation and federal laws in court, an arbitration court or international arbitration (arbitration tribunal)."
(all emphasis added by the Court of Appeal)
The LFI 1999 succeeded the LFI 1991. According to the Russian Federation, with the LFI 1999 the legislator did not intend to make substantive amendments pertaining to dispute resolution by means of arbitration. The Court of Appeal will also take this as a point of departure.
"Disputes between foreign investors and the State are subject to consideration in the USSR in courts, unless otherwise provided by international treaties of the USSR."
Also the Fundamental Principles Act provides, therefore, that an international treaty may prescribe that investment disputes between investors and the USSR can be resolved by means other than by a Russian court. Moreover, no limitation to private law disputes can be read therein. The Russian Federation's position that Article 43(1) of the Fundamental Principles Act only refers to ratified treaties should be rejected based on the considerations argued above: in the Russian legal system, a provisionally applied treaty has the same effect as a ratified treaty.
"Considering that the Agreement contains provisions different from those provided by the Russian legislation, it is subject to ratification in accordance with clause 15(1)(a) of the Federal Law (...) ‘on International Treaties of the Russian Federation’ (...) The key issues by virtue of which the above Agreement is subject to ratification are as follows (...) the settlement in an international arbitration court of investment disputes between one Party and an investor of the Other Party, as well as disputes between the Parties concerning the interpretation and application of the Agreement (...) the federal Law No. 1545-1 of July 4, 1991 ‘On Foreign Investment in the RSFSR’ does not provide for a mechanism of settlement of such type of dispute by international arbitration."
According to the Russian Federation, the explanations to other BITs include similar passages (Defence on Appeal, no. 224); these were partly quoted by professor Asoskov in his Expert Report of 10 November 2017. 77 In the explanation to the Act for approval of the BIT with Yemen, slightly different wording is used:
"Pursuant to Article 15 of the Federal Law 'On International Treaties of the Russian Federation', the Agreement is subject to ratification because it contains provisions which are not provided for by Russian legislation." 78
"(...) every kind of asset, owned or controlled directly or indirectly by an Investor and includes:
(a) tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens and pledges;
(b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;
(c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;
(d) Intellectual Property;
(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.
Article 1(7) ECT defines the term ‘Investor’ as follows:
"(a) with respect to a Contracting Party:
(i) a natural person having the citizenship or nationality of or who is permanently residing in that Contracting Party in accordance with its applicable law; (ii) a company or other organization organized in accordance with the law applicable in that Contracting Party;
(b) with respect to a "third state," a natural person, company or other organization which fulfils, mutatis mutandis, the conditions specified in subparagraph (a) for a Contracting Party."
"1352 (...) An investor who has obtained an investment in the host State only by acting in bad faith or in violation of the laws of the host state, has brought itself within the scope of application of the ECT through wrongful acts. Such an investor should not be allowed to benefit from the Treaty."
The Tribunal expressly does not take a position on whether failure to comply with this requirement of legality should lead to lack of jurisdiction of the Tribunal or result in an investor being deprived of the protection granted by an investment treaty. 85
1. Conduct of HVY in relation to the acquisition of Yukos and regarding the way in which control of Yukos and its subsidiaries has been consolidated.
2. Conduct of HVY relating to the Taxation Treaty between Cyprus and Russia.
3. Conduct of HVY relating to the use by HVY/Yukos of Russian low-tax regions.
4. Conduct of HVY frustrating the implementation of Russian tax measures.
1. The ECT is aimed at foreign investments and does not protect investment disputes between the state and its own citizens.
a. HVY are sham companies that are economically owned and controlled by Russian citizens.
b. HVY are not investors and did not make investments within the meaning of Article 1(6) and (7) because the ECT does not protect 'U-turn' investments. This follows from the subject and object of the ECT, the context, the principles of international law and is confirmed by subsequent state practice.
c. HVY did not make any investment within the meaning of the ECT because they did not make any foreign economic contribution in the Russian Federation.
d. The Russian nationals referred to under (a) above abused the corporate structure of HVY for illegal purposes, including tax evasion. This justifies piercing the corporate veil to expose these Russian nationals behind HVY.
2. The ECT does not protect HVY and their shares in Yukos because of the criminal and unlawful background and conduct of HVY and the Russian citizens.
"This Treaty establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter."
Additionally, the Russian Federation has highlighted the objectives of the Energy Charter, which states that its aim is to promote the international flow of investment and to provide a stable, transparent legal framework for foreign investment. 94 If the provisions in Article 1(6) and (7) ECT are placed in the context of the other treaty provisions, it also becomes clear, according to the Russian Federation, that the ECT only covers foreign investors and foreign investment. 95 The Russian Federation refers in particular to Article 26 ECT, which provides that the jurisdiction of an arbitral tribunal shall be limited to disputes between a contracting party and an investor of another contracting party. 96 It also considers that other ECT provisions make clear that the investments must be made by foreigners and not by nationals who divert their investments through sham companies. This follows, for example, from the words "investors of other Contracting Parties" (Articles 10, 11, 14, 24, 45 and 47 ECT) and "investment in the territory of another Contracting Party" (Articles 12, 13 and 15 ECT), according to the Russian Federation. 97
"Each Contracting Party reserves the right to deny the advantages of this Part to:
(1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized. (...)"
"259. In cases where legal title is split between a nominee and a beneficial owner international law is uncontroversial: (...) the dominant position in international law grants standing and relief to the owner of the beneficial interest - not to the nominee. (...)
262. The position as regards beneficial ownership is a reflection of a more general principle of international investment law: claimants are only permitted to submit their own claims, held for their own benefit, not those held (be it as nominees, agents or otherwise) on behalf of third parties not protected by the relevant treaty. And tribunals exceed their jurisdiction if they grant compensation to third parties whose investments are not entitled to protection under the relevant instrument."
"415. While it is perfectly conceivable to lift the corporate veil and ignore the legal personality of an investor in the case of fraud directed at jurisdiction, as could be an instrumental transfer of the assets of the investment after the emergence of the dispute, there is no basis for importing to the ECT a general rule according to which the nationality of the investor should be analysed according to an economic criterion, when the ECT itself refers to the legal criterion of incorporation of the company under the law of a Contracting Party. (...)
416. To adopt the argument of Spain would amount to denial of benefits whenever an investor, legal entity incorporated under the applicable law of a Contracting Party in accordance with Article 1(7)(a)(ii), was controlled by citizens or nationals of the State receiving the investment. However, the drafters of the ECT did not intend to include this hypothesis in the denial of benefits clause of Article 17, which relates to the situation of a legal entity controlled by shareholders of a third country (a third country being a country not party to the ECT). Regardless of whether a denial of benefits under Article 17 is a matter of merits or jurisdiction - question that the Tribunal does not have to assess in this award - is an illustration of the fact that the drafters of the ECT did not want to exclude from the scope of its application the investors as legal entities controlled by nationals of the Contracting State receiving the investment."
"145. This text may be interpreted in a strict constructionist manner to mean that a tribunal has to go always by the formal nationality. On the other hand, such a strict literal interpretation may appear to go against common sense in some circumstances, especially when the formal nationality covers a corporate entity controlled directly or indirectly by persons of the same nationality as the host State."
However, the Russian Federation ignores the context of this finding: the arbitral tribunal examined whether the claimant was to be considered a national of a contracting state within the meaning of Article 25(2)(b) ICSID, in particular whether the claimant - a legal person under the law of Argentina - was to be considered a national of another contracting state within the meaning of this provision of the treaty. There is therefore no question here is of whether the arbitral tribunal formulates a general principle of law in the sense referred to by the Russian Federation.
"The parties to the Treaty could have included in their agreed definition of "investor" some words which would have served, for example, to exclude wholly-owned subsidiaries of companies constituted under the laws of third States, but they did not do so. The parties having agreed that any legal person constituted under their laws is entitled to invoke the protection of the Treaty, and having so agreed without reference to any question of their relationship to some other third State corporation, it is beyond the powers of this Tribunal to import into the definition of "investor" some requirement relating to such a relationship having the effect of excluding from the Treaty’s protection a company which the language agreed by the parties included within it."
HVY have also pointed to a number of ECT cases. In the arbitral award in the case Plama v. Bulgaria 110 the arbitral tribunal has held that, for the purposes of qualifying as an "investor" within the meaning of Article 1(7) ECT, it is irrelevant who is the owner of the investing company and/or by whom it is controlled. In Isolux v. Spain 111, it was argued by Spain that Isolux (a company incorporated under Dutch law) was a sham company which was actually controlled by its Spanish shareholders and therefore was not an investor within the meaning of Article 1(7) ECT. The arbitral tribunal rejected that assertion and considered that, apart from "fraud in the adjudication of justice":
"670. (...) the Arbitral Tribunal notes that the ECT does not contain, as some Treaties do, a carve-out clause to exclude application of the requirement to be organised pursuant to the laws of other Contracting Party where a legal person is controlled by nationals of the other Contracting State. (...)"
In short, the Court of Appeal agrees with HVY that there is no general principle of law according to which investment treaties do not provide protection to companies wholly controlled by nationals of the host country.
In this respect, the Russian Federation has also invoked international arbitral case law, more specifically the 'Salini criteria'. These criteria are derived from the arbitral award of 23 July 2001 concerning Salini v. Morocco. 115 In that case, the arbitral tribunal was faced with the question whether the case involved an 'investment' within the meaning of the ICSID. It should be noted that the ICSID -unlike the ECT - did not contain a definition of the term investment, so the arbitral tribunal had to determine the meaning of that term itself. The arbitral tribunal considered as follows:
"The doctrine generally considers that investment infers: contributions, a certain duration of performance of the contract and a participation in the risks of the transaction (...) In reading the Convention's preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition.
In reality, these various elements may be interdependent. Thus, the risks of the transaction may depend on the contributions and the duration of performance of the contract. As a result, these various criteria should be assessed globally even if, for the sake of reasoning, the Tribunal considers them individually here."
"111. The Tribunal is not convinced (...) that a contribution to the host State’s economic development constitutes a criterion of an investment within the framework of the ICSID Convention. Those tribunals that have considered this element as a separate requirement for the definition of an investment, such as the Salini Tribunal, have mainly relied on the preamble to the ICSID Convention to support their conclusions. The present Tribunal observes that while the preamble refers to the "need for international cooperation for economic development." it would be excessive to attribute to this reference a meaning and function that is not obviously apparent from its wording. In the Tribunal’s opinion, while the economic development of a host State is one of the proclaimed objectives of the ICSID Convention, this objective is not in and of itself an independent criterion for the definition of an investment. The promotion and protection of investments in host States is expected to contribute to their economic development. Such development is an expected consequence, not a separate requirement, of the investment projects carried out by a number of investors in the aggregate."
"56 (...) Here, then, as elsewhere, the law, confronted with economic realities, has had to provide protective measures and remedies in the interests of those within the corporate entity as well as of those outside who have dealings with it: the law has recognized that the independent existence of the legal entity cannot be treated as absolute. It is in this context that the process of "lifting the corporate veil" or "disregarding the legal entity" has been found justified and equitable in certain circumstances or for certain purposes. The wealth of practice already accumulated on the subject in municipal law indicates that the veil is lifted, for instance, to prevent the misuse of the privileges of legal personality, as in certain cases of fraud or malfeasance, to protect third persons such as a creditor or purchaser, or to prevent the evasion of legal requirements or of obligations."
However, these findings did not relate to the jurisdiction of the ICJ, but to the question whether the claimant (Belgium) could bring an action against Spain in favour of the (Belgian) shareholders of Barcelona Traction, a company incorporated under Canadian law. The Court of Appeal is of the view that it is not possible to infer from Barcelona Traction a fundamental principle of law in the sense intended by the Russian Federation.
"156. Here the Claimant’s conduct is not even close to proper conduct. Had Cementownia actually proven that on May 30, 2003 it legally acquired the shares of CEAS and Kepez, there would still be the question of whether this was treaty shopping of the wrong kind (...)."
Nor, in the view of the Court of Appeal, does this case support the assertion of the Russian Federation that there is an international principle of law that the corporate veil should be pierced because the legal form has been abused for fraud. The same applies to the cases of Phoenix Action v. Czech Republic and Alapli v. Turkey, which have already been discussed by the Court of Appeal (para. 18.104.22.168 and 22.214.171.124). 122 These cases do not concern "piercing the corporate veil", but the situation that the claimant acquired the shares in a company in the arbitration proceedings with the main purpose of gaining access to international arbitration.
In the view of the Court of Appeal, it can be inferred from international arbitration case law that there is a principle of international law which entails that international investments made in breach of the law of the host state do not deserve protection. This also applies even if the relevant investment treaty does not expressly provide for it. For example, in the case of Phoenix v. Czech Republic 126, the arbitral tribunal considered:
"101. In the Tribunal’s view, States cannot be deemed to offer access to the ICSID dispute settlement mechanism to investments made in violation of their laws. If a State, for example, restricts foreign investment in a sector of its economy and a foreign investor disregards such restriction, the investment concerned cannot be protected under the ICSID/BIT system. These are illegal investments according to the national law of the host State and cannot be protected through an ICSID arbitral process. And it is the Tribunal’s view that this condition - the conformity of the establishment of the investment with the national laws - is implicit even when not expressly stated in the relevant BIT."
And in the case of Fraport v. Philippines 127, the arbitral tribunal considered:
"332. The Tribunal is also of the view that, even absent the sort of explicit legality requirement that exists here, it would (...) still be appropriate to consider the legality of the investment. As other tribunals have recognized, there is an increasingly well-established international principle which makes international legal remedies unavailable with respect to illegal investments, at least when such illegality goes to the essence of the investment."
However, in order to lose the protection of an investment treaty, it must concern cases where - as is for example considered in Oxus Gold v. Uzbekistan 128 - "the illegality affects the "making", i.e. arises when initiating the investment itself and not just when implementing and/or operating it." Or in Hamester v. Ghana 129 in which the arbitral tribunal distinguishes between"(1) legality as at the initiation of the investment ("made") and (2) legality during the performance of the investment". Therefore, to the extent that the Russian Federation invokes illegal conduct by HVY in the period after HVY made their investment in Yukos, this cannot lead to a lack of jurisdiction of the Tribunal. More specifically, this concerns HVY's conduct related to the Tax Treaty between Cyprus and Russia, HVY's conduct related to tax avoidance by Yukos and HVY's conduct that prevented the collection of taxes (Final Award, nos. 1291-1310). None of this conduct affects the jurisdiction of the Tribunal.
Where it is established that illegality is involved in the making of the investment, a distinction should be made in terms of consequences between (a) investment treaties in which the definition of the term 'investment' includes a phrase to the effect that the investment must have been made 'in accordance with the law', or words of a similar nature, and (b) investment treaties in which this is not the case. In the case of treaties of the former category, the prevailing doctrine seems to be that illegality leads to the fact that no investment has been made within the meaning of the investment treaty, so that the arbitral tribunal does not have jurisdiction to hear the investor's claim. 130 However, the ECT does not fall into the first category of treaties, so the Court of Appeal can leave aside what has been considered in respect of those treaties.
Where a treaty does not contain a legality requirement (the second category of treaties), arbitral case law is divided on what should be the consequence when an investor acts 'illegally' in making the investment. In Phoenix v. Czech Republic, for example, the arbitral tribunal considered:
"102. The core lesson is that the purpose of the international protection through ICSID arbitration cannot be granted to investments that are made contrary to law. The fact that an investment is in violation of the laws of the host State can be manifest and will therefore allow the tribunal to deny its jurisdiction. Or, the fact that the investment is in violation of the laws of the host State can only appear when dealing with the merits, whether it was not known before that stage or whether the tribunal considered it best to be analysed as the merits stage, like in the case of Plama.
104. There is no doubt that the requirement of the conformity with law is important in respect of the access to the substantive provisions on the protection of the investor under the BIT. This access can be denied through a decision on the merits. However, if it is manifest that the investment has been performed in violation of the law, it is in line with judicial economy not to assert jurisdiction."
The arbitral tribunal applies a fairly pragmatic rule of thumb in this case: bearing in mind grounds of procedural economy, only obvious illegality leads to lack of jurisdiction. 131 In the case Plama v. Bulgaria 132, the arbitral tribunal ruled that the claimants 'misrepresentation' at the time the investment was made meant that:
"146 (...) this Tribunal cannot lend its support to Claimant’s request and cannot, therefore, grant the substantive protections of the ECT."
Thus, in that case the arbitral tribunal ruled that the claimant could not derive any material protection from the ECT because of the malpractices it had committed in making the investment. In any event, the arbitral tribunal considered that these malpractices (in this case) could not affect its jurisdiction:
"112. Contrary to Respondent’s argument, the matter of the alleged misrepresentation by Claimant does not pertain to the Tribunal’s jurisdiction: that was already decided in the Decision on Jurisdiction. Rather, the matter concerns the question as to whether Claimant is entitled to the substantive protections offered by the ECT."
In the case of Blusun v. Italy 133, the arbitral tribunal did not consider whether the fact that the investments were contrary to the law should lead to the arbitral tribunal's lack of jurisdiction. The arbitral tribunal merely confirmed that the ECT does not protect investments made in breach of the law. Under the heading 'issues of jurisdiction and admissibility', the arbitral tribunal considered:
"264. As to the lawfulness of the Project, it is true that the ECT does not lay down an explicit requirement of legality, but the Tribunal concludes that it does not cover investments which are actually unlawful under the law of the host state at the time they were made because protection of such investments would be contrary to the international public order. This conclusion is consistent with numerous other decisions and awards. In particular, the Plama tribunal found that because: ‘...the ECT should be interpreted in a manner consistent with the aim of encouraging respect for the rule of law... the substantive protections of the ECT cannot apply to investments that are made contrary to law’."
On the other hand, the arbitral tribunal considered in Ampal v. Egypt 134 :
"301. It is a well-established principle of international law that a tribunal constituted on the basis of an investment treaty has no jurisdiction over a claimant's investment which was made illegally in violation of the laws and regulations of the Contracting State."
"1370. In the present case (...) Respondent has failed to demonstrate that the alleged illegalities to which it refers are sufficiently connected with the final transaction by which the investment was made by Claimants. The transactions by which each Claimant acquired its investment were their purchases of Yukos shares. As established in the Interim Award, these purchases were legal and occurred starting in 1999. On the other hand, the alleged illegalities connected to the acquisition of Yukos through the loans-for-shares program occurred in 1995 and 1996, at the time of Yukos’ privatization. They involved Bank Menatep and the Oligarchs, an entity and persons separate from Claimants, one of which - Veteran -had not even come into existence. With respect to Respondent’s other allegations, regarding profit skimming and the oppression of minority shareholders, it is also clear to the Tribunal that they are not part of the transaction or transactions by which each Claimant acquired their interest in Yukos."
"Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency."
Paragraph 5 of the same article reads, in so far as relevant:
"a. Article 13 shall apply to taxes.
b. Whenever an issue arises under Article 13, to the extent it pertains to whether a tax constitutes an expropriation or whether a tax alleged to constitute an expropriation is discriminatory, the following provisions shall apply:
(i) The Investor or the Contracting Party alleging expropriation shall refer the issue of whether the tax is an expropriation or whether the tax is discriminatory to the relevant Competent Tax Authority. Failing such referral by the Investor or the Contracting Party, bodies called upon to settle disputes pursuant to Article 26(2)(c) shall make a referral to the relevant Competent Tax Authorities."
• The attribution to Yukos of the revenues earned by its trading companies, even though there was no precedent in Russia for such attribution based on the theory of "actual owner", and the refusal at the same time to give Yukos any of the benefits of the VAT filings made by the trading companies, with the result that Yukos was assessed USD 13.5 billion or 56 percent of the total tax claims levied against Yukos;
• The imposition on Yukos of the "willful offender" fines, at the very least as they related to VAT;
• The refusal of the tax authorities to give Yukos the benefit of Article 3(7) of the Russian Tax Code to resolve doubts as to the interpretation of Article 112(2) of the Russian Tax Code in favor of the taxpayer, with the resulting imposition of nearly USD 4 billion in "repeat offender" fines; and
• The imposition of "repeat offender" fines on Yukos when the conduct that was punished occurred prior to the determination by the courts that the conduct was wrongful; for example, the "repeat offender" fine assessed against Yukos for the 2001 tax year is based on the finding by the courts in 2004 that the conduct in 2000 was wrongful.
(i) Noncompliance with Article 21(5)(b) ECT (para. 6.3);
(ii) Determination of damages (para. 6.4);
(iii) Deciding by guesswork and going beyond the ambit of the legal dispute (para. 6.5) 156 ;
(iv) Role of the assistant to the Tribunal (para. 6.6).
Without these actions, Yukos would have been able to pay the tax claims of the Russian Federation and would not have been declared bankrupt and liquidated (Final Award no. 1579). According to the Tribunal, the Russian Federation had not explicitly expropriated Yukos or the shares of its shareholders, but the measures taken by the Russian Federation against Yukos had "an effect equivalent to nationalization or expropriation" (Final Award no. 1580). For the sake of brevity, the Court of Appeal will hereinafter refer to ‘expropriation’ where it means: measures "equivalent to nationalization or expropriation", in line with the approach apparently taken by the Tribunal as well. The Tribunal held that the Russian Federation is liable under international law for breach of Article 13 ECT, so that it did not have to decide whether the Russian Federation is also liable under Article 10 ECT (Final Award no. 1585). Finally, the Tribunal decided that HVY contributed 25% of the damage suffered as a result of the destruction of Yukos by the Russian Federation, so that 25% of the damage should remain at their expense (Final Award no. 1637).
a. The date of the expropriation of HVY's investment ("the date of the expropriation of Claimants' investment") is 19 December 2004, the date on which YNG was auctioned off and as a result of which a substantial and irreversible expropriation of HVY's property took place (Final Award nos. 1761-1762).
b. If, as in this case, a wrongful expropriation has taken place, the valuation date ("the date of the taking") provided for in Article 13 ECT does not apply. In the case of an unlawful expropriation, the investor may choose between the date of the expropriation (19 December 2004) or the date of the arbitral (final) award as the valuation date for the calculation of the damages (Final Award nos. 1765 and 1769). For the purpose of determining the damage, the Tribunal assumes that the date of the Final Award is 30 June 2014. The Tribunal must therefore determine the total damage on both possible dates, with HVY being entitled to the highest amount, less 25% for 'contributory fault' (Final Award no. 1777). (As the Tribunal ultimately concluded that the calculation as at 30 June 2014 provides the highest amount of damages and awarded the damages on this basis, only the findings and calculations relating to this valuation date will be set out below, Court of Appeal).
c. HVY is entitled to the following damage components: (1) the value of the shares in Yukos on the valuation date, (2) the value of the dividends which Yukos would have paid to HVY up to the valuation date had the expropriation not taken place ("but for the expropriation of Yukos"), and (3) "pre-award simple interest on these amounts" (Final Award no. 1778). A possible listing of the Yukos shares on the New York Stock Exchange and a possible merger between Yukos and Sibneft should be excluded from the damage estimate (Final Award nos. 1779-1780).
d. In nos. 1782-1790, the Tribunal discusses the first damage component, the value of Yukos shares. HVY had proposed three different methods of valuation, the DCF (Discounted Cash Flow) method, the comparable companies method and the comparable transactions method. In addition, HVY and their expert (Mr Kaczmarek of Navigant, hereinafter: ‘Kaczmarek’) had made a number of secondary calculations in support of their three main methods. These different valuations are shown in a table in the Final Award (no. 1782).
e. The expert of the Russian Federation, Prof. Dow (hereinafter: ‘Dow’), did not provide an own method for valuing Yukos, but he did provide a corrected version of the ‘comparable companies method’. The thus corrected calculation of Dow amounts to USD 67,862 billion as at 21 November 2007. Dow has stated that this "could be a useful evaluation". Assuming a 90/10 equity/debt capital structure of Yukos, this corresponds to an equity value of Yukos as at 21 November 2007 of approximately USD 61,076 billion (Final Award no. 1783).
f. "The "corrected" comparable companies figure is the best available estimate for what Yukos would have been worth on 21 November 2007 but for the expropriation" (Final Award no. 1784). The other methods put forward by HVY, including the DCF method and the secondary calculations, are not considered sufficiently reliable by the Tribunal for several reasons (Final Award no. 1785-1786).
g. The Tribunal then considered (Final Award no. 1787):
"By contrast to all of the other methods canvassed above, the Tribunal does have a measure of confidence in the comparable companies method as a means of determining Yukos’ value. While Professor Dow stated at the Hearing that he had not performed an analysis sufficient to fully endorse the figure resulting from his corrections to Claimants’ comparable companies approach, he agreed that it "could be a useful valuation." The Tribunal for its part finds that the comparable companies method is, in the circumstances, the most tenable approach to determine Yukos’ value as of 21 November 2007, and therefore the starting point for the Tribunal’s further analysis."
h. To adjust the value of Yukos to the relevant valuation date in November 2007, the Tribunal used the ‘RTS Oil and Gas index’. This index is based on shares traded on the Moscow Stock Exchange, including the shares of nine oil and gas companies. Both parties referred to the RTS Oil and Gas index as a reliable indicator of changes in the value of Russian oil and gas companies (Final Award no. 1788).
i. The value of Yukos as at 21 November 2007 (USD 61,076 billion) should therefore be indexed as at the valuation date (30 June 2014) using the RTS Oil and Gas index (Final Award no. 1789).
j. For the calculation of the damage consisting of lost dividends, the Tribunal takes as a starting point the ‘Yukos lost cash flows (i.e., free cash flow to equity)’ calculated by Kaczmarek as at 21 November 2007. The ‘lost cash flows’ between 2004 and 21 November 2007 are presented in Kaczmarek's first report as based on ‘actual historical information’, in contrast to the cash flows included in Kaczmarek's DCF model for the period from 21 November 2007 to the end of 2015, which are based on ‘forecasts and projections’ using information from before that period (Final Award no. 1793). In his second report, Kaczmarek included ‘lost cash flows’ for the period 2004-2011 that are presented as based on ‘actual historical information’, in contrast to the cash flows included in Kaczmarek's DCF model for the period 2012 to the end of 2019 that are based on ‘forecasts and projections’ using information from before that period (Final Award no. 1794).
k. For the period 2012 to 2014, the Tribunal could determine the relevant numbers using Kaczmarek's method by using data found elsewhere in Kaczmarek's reports. On the basis of these data and method, which are explained in more detail in no. 1796 Final Award and which are specified in Tables T4-T6 attached to the Final Award, the total amount of lost dividends from 2004 to 30 June 2014 according to Kaczmarek's model totals at USD 67,213 billion (Final Award no. 1795-1797). For the Tribunal, this was the starting point for calculating the dividends that HVY would have received in the (hypothetical) situation that the expropriation had not taken place (Final Award no. 1798).
l. Although Kaczmarek's figures are partly based on historical data ("and thus are not plagued by some of the errors associated with forecasts and projections"), some of the criticisms made by Dow of Kaczmarek's DCF model also apply to the calculation of dividends, such as the reproach that HVY underestimated Yukos' transport and operating expenses (Final Award nos. 1799-1801).
m. Using the spreadsheets provided by Dow in his second report, the corrected ‘free cash flow to equity’ for the relevant years can be calculated. Although Dow did not explicitly endorse this corrected version as his view of Yukos’ ‘free cash flow to equity’, it is clear that the figure expressed herein is more in line with his view. Based on this corrected method, the total of Yukos’ dividends for the period from 2004 to the first half of 2014 amounts to USD 49,293 billion (see Table T3 of the Final Award, the total of the second column) (Final Award no. 1802).
n. A number of additional corrections need to be made in addition to Dow’s corrections because they did not take into account all the risks to Yukos’ cash flow that would have been incurred if it had been able to continue its business. Corrections should be made for: the risk of substantially higher taxes, the risk in relation to Yukos’ dividend policy, as well as the risks associated with the complex and opaque offshore structure set up to channel money earned by Yukos abroad. As a result of these adjustments, the total of Yukos' dividends for the period from 2004 to the first half of 2014 amounts to USD 45 billion (Final Award nos. 1803-1812).
o. The value of Yukos as at 21 November 2007 (USD 61,076 billion) indexed with the RTS Oil and Gas index is USD 42,625 billion as at 30 June 2014. The value of HVY's 70.5% share therein is USD 30,049 billion (Final Award nos. 1821 and 1822).
p. Yukos’ dividends for the period from 2004 up to and including the first half of 2014 amount to USD 45 billion, USD 51,981 billion with accrued interest. HVY's 70.5% share therein amounts to USD 36,645 billion (Final Award nos. 1823 and 1824).
q. The total damage of HVY as a result of the violation of Article 13 ECT as of 30 June 2014 thus amounts to (USD 30,049 billion + USD 36,645 billion =) USD 66,694 billion (Final Award no. 1825). Reduced by 25% due to contributory fault, the damage amounts to USD 50,020,867,798 (Final Award no. 1827).
"Q. If we go back to [page] 195 [of the second report of Dow, Court of Appeal], the Yukos and YukosSibneft valuation in 2007, there we also have a figure for the comparable analysis. For Yukos, in figure 73, you have $67.8 billion; and for YukosSibneft you have $93.7 billion. Would those figures constitute a valid result in terms of valuation in the same manner as for YNG?
A. They are not presented in that context, but I think I’d have to agree that they could be a useful valuation, yes.
Q. How useful, in your view? (Pause)
A. Well, the thing is I don’t like to provide a valuation on the hoof, as it were. So the numbers in those tables are not numbers I’ve thought about in that context. I guess looking at them on the hoof, as that’s what we’re doing here, I am a bit concerned that the YukosSibneft number is very different to the Yukos number, since the theory of Mr Kaczmarek’s analysis of how YukosSibneft created value is limited to some synergies which he doesn’t think are very big. In addition I would have to do a bit more analysis, I think, to try and study, if we look at figure 73, the 67 billion for Yukos, how that relates to what it was in 2004, how oil prices have changed over that period. So I haven’t done enough analysis on these to endorse them in that sense, and I don’t think it would be responsible of me to endorse them for a purpose that they weren’t reported in that figure as being useful for."